Japan export growth remains tepid, dims outlook

TOKYO | By Tetsushi Kajimoto

A worker walks in a container area at a port in Tokyo April 21, 2014.

Reuters/Toru Hanai

TOKYO (Reuters) - Japan's exports rose for the 14th straight month in April but shipments to the United States slowed, underlining concerns that the world's third-largest economy remains vulnerable to any fall in external demand.

Ministry of Finance data released on Wednesday showed exports rose 5.1 percent in the year to April, compared with a 4.8 percent gain seen by economists and a 1.8 percent rise in March. On a seasonally adjusted basis, exports rose a meagre 0.6 percent in April from the previous month.

With export growth below last year's levels as the effect of a weak yen wears off, policymakers are becoming less confident of a lasting export upturn that would cushion a dip in domestic spending after Japan raised its sales tax to 8 percent from 5 percent on April 1.

Analysts say the Bank of Japan may act if the trade performance falls short - a side effect of many firms moving production facilities offshore to escape years of the yen's strength.

"Exports picked up just a tad from March but they still lack momentum. U.S.-bound shipments were unexpectedly poor," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.

Shipments to the United States - a key market for Japanese products - rose 1.9 percent on an annual basis. That was a slowdown from a 3.6 percent gain in March, with steel shipments falling in April.

"I expect the U.S. economy to drive the global economy this year but if that scenario fails, that could raise the chance of fresh BOJ stimulus, although the bank is focusing more on prices," said Minami.

The Bank of Japan is expected to keep its monetary policy unchanged when it announces its decisions later in the day, likely sounding upbeat on the economy in a sign that no additional monetary stimulus is on the horizon.

The central bank is expected to take heart from surprisingly strong first-quarter capital investment and buoyant machinery orders for March, which some economists took as a sign companies are optimistic that overseas sales will eventually pick up.

WEAK YEN EFFECTS FADE

Japan's exports had grown at double-digit pace in the second half of last year, but growth has slowed to below 10 percent this year as effects of a weak yen wear off.

Prime Minister Shinzo Abe's aggressive stimulus policies weakened the yen by some 20 percent annually since he took power in late 2012, boosting exporters' profits and share prices.

But the yen's slide slowed this year to about 6 percent year-on-year in April, limiting gains in the value of exports.

More worryingly, the yen's fall failed to shore up export volumes, which peaked in 2007 and have been falling for a third straight year in 2013.

Export volumes edged up 2 percent in April from a year before - the first gain in two months - illustrating the plight of the export sector as a weak yen has boosted import costs more than export income, the data showed.

Imports have surged in part due to a spike in demand for oil and gas after nuclear power plants were shut down following 2011's Fukushima crisis. Recently imports got a further boost from Japanese shoppers' rush to beat the tax hike.

Reflecting a pullback in demand after the tax hike, imports grew an annual 3.4 percent in the year to April, slowing sharply from a 18.1 percent increase in March, the MOF data showed.

That brought the trade deficit to 808.9 billion yen ($7.98 billion), versus a shortfall of 646 billion yen expected, narrowing from a 1.45 trillion yen gap in March. Still, it marked a record 22nd straight month of deficits.

Economists had long anticipated a so-called 'J-curve' effect, where a spike in import costs would over time be more than offset by gains in exports.

However, that effect has yet to emerge, partly because firms have shifted production overseas after years of yen strength. The yen's retreat failed to reverse the trend due to the desire to move facilities closer to fast-growing markets.

The trend mirrors both the declining share of "Made in Japan" products, such as electronic goods, in firms' overseas sales, and their reluctance to risk trade tensions by using the yen's weakness to cut prices and boost market share, analysts say.

External demand shaved 0.3 percentage points off gross domestic product in January-March, yet the economy grew the most in more than two years on the strength of private consumption and capital spending ahead of the April 1 sales tax hike.

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